Everyone in the stock market needs an investing strategy that grows with each investment. Over the years I have honed my investment strategy to identify investments that fit my personal preference: value investing. I look for stocks with plenty of room to grow that have mistakenly been put on sale.
Right now, three stocks have blipped my radar that I believe present perfect value investing situations.
On sale
My strategy looks for companies on sale. Generally, I look for stocks that are down at least 25% from 52-week highs, or in some cases from two year highs. Here are 3 that fit this description:
Cirrus Logic, Inc. (NASDAQ:CRUS)
Zagg Inc (NASDAQ:ZAGG)
Cellcom Israel Ltd (NYSE:CEL)
I want to emphasize that not all stocks on sale are value opportunities. Take Skullcandy Inc (NASDAQ:SKUL) for instance. The company’s stock is down 65% from 52-week highs, and for good reason:
SKUL Revenue TTM data by YCharts
The revenue drop is to be expected since 4th quarter revenue generally spikes. But by only making headphones, Skullcandy Inc (NASDAQ:SKUL) is vulnerable to attack to more diversified players like Zagg Inc (NASDAQ:ZAGG). When Skullcandy lowers prices to compete, its profit margin plummets. Margins are expected to continue to drop going forward. Currently the p/e ratio is about 9 — seemingly an attractive entry point. But a weak profit margin will send earnings the wrong way as reflected by Skullcandy’s forward p/e of 19. Looking at this, it doesn’t seem that this company is a value opportunity. Rather the share price is dropping to reflect a more realistic valuation for the company.
A more attractive option is Cellcom Israel Ltd (NYSE:CEL) — down over 70% from 2 years ago. This nose-dive is attributable to several factors including a more competitive Israeli telecommunication market triggered by new legislation, and a dividend that was eventually cut. Now two years later, Cellcom Israel Ltd (NYSE:CEL) may be an attractive investment once again. The current p/e is about 8, but the forward p/e is just 2. The company right now has very little downside and — with chances of a reinstated dividend looming — looks to have significant upside from here.
Forward earnings
Forward earnings has some drawbacks as a metric (as does any metric), but it can show you which way earnings are going. When finding a value opportunity, I generally avoid any stock who’s forward p/e is greater than its current p/e.
This rules out Weight Watchers International, Inc. (NYSE:WTW). Currently the p/e is 10, but the forward p/e is 11. Compared with the industry p/e average of 20, it looks attractive. But the problem is Weight Watchers International, Inc. (NYSE:WTW) growth has stalled. Management hoped a recent growth plan called “Weight Watchers 360” would attract new members, but in the end it appealed more to current members. Having failed to attract new members, the company’s revenue fell 3% in the most recent quarter. Investors should proceed with caution until management can come up with a concrete plan to grow revenue.
Cirrus Logic, Inc. (NASDAQ:CRUS) on the other hand is expected to grow earnings 5% this year.
CRUS Revenue TTM data by YCharts
Investors have come to expect much more than 5% a year for earnings from this company, but now with a p/e ratio under 10 — compared to an 82 average for the tech sector — I believe investors have overreacted with Cirrus Logic, Inc. (NASDAQ:CRUS).
The majority of this company’s revenue comes from Apple Inc. (NASDAQ:AAPL). Given that Apple Inc. (NASDAQ:AAPL)’s product launches came late in the year, it makes sense that Cirrus Logic, Inc. (NASDAQ:CRUS)’s growth slowed in 2012. With potential new products in 2013 — like iPad Mini with Retina Display — Cirrus Logic, Inc. (NASDAQ:CRUS) still looks to have revenue opportunities this coming year.
Growth
Zagg Inc (NASDAQ:ZAGG) is a company in a fantastic market — cheap mobile accessories. What is cool about this company is it doesn’t matter whether it’s Apple, Amazon.com, Inc. (NASDAQ:AMZN), Microsoft Corporation (NASDAQ:MSFT)…or whoever’s device: Zagg Inc (NASDAQ:ZAGG) has an accessory. This puts Zagg Inc (NASDAQ:ZAGG) in a very safe position — poised to profit no matter who is selling the mobile device.
Recently this stock was punished severely for missing estimated earnings and also slashing its earnings guidance over 10%. Zagg Inc (NASDAQ:ZAGG) said it missed because Apple has delayed product releases.
ZAGG Revenue TTM data by YCharts
Earnings have fallen, as demonstrated by the cliff at the end of the chart. But this slip is expected to be temporary. Zagg’s p/e is currently 15 — already significantly below the industry’s 25 average — but the company has a forward p/e of just 6.
But perhaps this company’s most attractive selling point is its price to earnings growth ratio of 0.32. This ratio divides a company’s earnings by its projected growth rate. All things being equal, anything below 1 is considered a value opportunity. Does 0.32 make Zagg a screaming buy?
Foolish takeaway
True value opportunities rarely last very long. Wall Street quickly tunes into the unique situation and drives the price back up to where it should be. Only invest with due diligence and never with a knee-jerk reaction, but you really need to investigate Cirrus Logic, Inc. (NASDAQ:CRUS), Zagg, and Cellcom Israel Ltd (NYSE:CEL).
| Company | Stock Price Change | P/E | Forward P/E | PEG |
| Cirrus Logic | (61)% | 8.68 | 8.19 | 0.37 |
| Zagg | (60)% | 15.21 | 6.35 | 0.32 |
| Cellcom Israel | (72)% | 7.87 | 2.46 | 1.64 |
Earnings growth, attractive PEG, and an oversold stock price all combined makes these three companies perfect investment opportunities. Some may question the disclaimer below that reveals I’m an investor in all three companies. It’s simple: I believe so strongly in these opportunities that I am willing to take my own investing advice.
The article 3 Cheap Stocks You Need To Buy Now originally appeared on Fool.com.
Jon Quast owns shares of Cirrus Logic, Zagg, and Cellcom Israel. The Motley Fool owns shares of Cirrus Logic and SKULLCANDY INC. (NASDAQ:SKUL). Jon is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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